UTSI»Topics» Material weakness 5 identified as of September 30, 2006, resulting from the Companys review of its

Material weakness 5
identified as of September 30, 2006, resulting from the Companys review of its
historical stock option practices, as described above under Governance Committee Review of Historical Stock
Option Accounting

Remediation Initiatives. The Companys planned remediation measures are intended to address
material weaknesses in internal control over its accounting for and disclosure
of stock-based compensation expense that have the potential of misstating these
balances in the financial statements in future financial periods. These
measures include the following:

1.In November 2006, the Company migrated to a new vendors system
for stock options and equity awards administration, selected in part for its improved processes, systems and controls.

2.In April 2007, the Companys compensation committee of the board of
directors approved an equity award grant policy and procedures (Awards Policy).
Under this Awards Policy, the Company has adopted the following equity awards
grant processes:

a)Equity awards will
be made only on grant dates pre-determined in accordance with the Awards
Policy.

b)The awards
committee (a committee as defined in the Awards Policy consisting of human
resources, legal and finance personnel, duly formed and authorized by the
compensation committee, with specific, limited authority to approve certain
grants of equity awards) will ensure completeness and accuracy of the final
equity awards grant list.

c)All equity awards
will be approved monthly, at a meeting of the awards committee, the
compensation committee or the board of directors, as applicable.

3.Relevant personnel at
the Company will be provided training in the equity awards granting and
accounting process.

4.In April 2007, the Company created the position of
and hired a new chief ethics officer, to provide focused executive leadership
in the area of corporate ethics and integrity.

5.During 2007, the Company will update its record
retention policy to specify retention of equity award records.

Interim Measures.Management
has not yet implemented and/or tested the effectiveness of all the measures
described above. Nevertheless, management believes those measures identified
above as having been implemented, together with the other measures undertaken
by the Company described below, all of which were undertaken during the first
three quarters of 2006 or subsequent to September 30, 2006 in connection with
the September 30, 2006 quarter-end reporting process, address material weakness
5, as described above under Governance Committee
Review of Historical Stock Option Accounting. These other measures
include, as part of the voluntary review of historical stock option practices,
the Governance Committee retaining independent outside counsel and forensic
accountants to review substantially all equity grant awards made in the Review
Period for compliance with the various stock-based compensation accounting
standards applicable during the Review Period and, as necessary to establish
alternative measurement dates for those grants where the original measurement
date was found to be in error. In addition, the accounting and reporting
process for the consolidated financial statements for the quarter ended
September 30, 2006 was extended significantly, thereby allowing the Company
time to conduct additional procedures and analyses, to assess the adequacy and accuracy
of reserves and actual expense results, and to make additional adjustments and
disclosures as necessary to ensure the accuracy of financial reporting.

Material weakness 6 identified as of September 30,
2006, resulting from the Companys review of historical sales in China,
as described above under Audit
Committee Investigation of Historical Sales in China

Remediation Initiatives. The Companys planned remediation measures are intended to address
material weaknesses in internal control over its customer agreements and the
related revenue recognition in China that have the potential of misstating its
revenue, deferred revenue, cost of sales and deferred cost accounts, related
income tax accounts, retained earnings and related financial disclosures in the
financial statements in future financial periods. These measures include the
following:

1.In the period from
January to May, 2007, the Company effected personnel changes in the sales force
in Chinas western sales region, as well as certain associated sales offices.
The Company believes that these changes will enable effective management of the
China western sales regions sales operations and enhance compliance with the
Companys policies and procedures, including the Companys Code of Business
Conduct and Ethics.

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2.The Company plans to
revise its policies and procedures
related to entering into sales contracts, document retention, as well the Code
of Business Conduct and Ethics to provide for details around the standards for
entering into sales agreements and breaches to the Code of Business Conduct and
Ethics.

3.The Company plans to
implement mandatory training to employees in Chinas sales organization around
control consciousness and ongoing training to Sales, Contract Management and
Finance in China around the Companys policies and procedures, including
revenue recognition.

4.The Company plans to
review and make improvements to the sales databases to capture relevant
contract information and current status information.

5.The Company plans to establish
a process around organizing visits by business operations and the regional
sales managers to the various sales offices in China to enhance the awareness
and compliance with the Companys polices and procedures.

Interim Measures.Management has not
yet implemented and/or tested the effectiveness of all the measures described
above. Nevertheless, management believes those measures identified above as
having been implemented, together with the other measures undertaken by the
Company described below, all of which were undertaken during the first three
quarters of 2006 or subsequent to September 30, 2006 in connection with the
September 30, 2006 quarter-end reporting process, address material weakness 6, as
described above underAudit Committee Investigation of Historical Sales
in China. These other measures include, as part of
the investigation of historical sales in China, the Audit Committee retaining independent
outside counsel and forensic accountants to conduct an investigation of sales
in China. The investigation was expanded to consider sales contracts
entered into in the period 2000 to 2006 in China, beyond the western region in
order to provide adequate coverage percentage of the value of sales contracts
entered into during the period. The investigation encompassed different review
procedures depending on the contract type, date and region in which the
contracts were executed. In addition, the accounting and reporting process for
the consolidated financial statements for the quarter ended September 30, 2006
was extended significantly, thereby allowing the Company time to conduct
additional procedures and analyses, to assess the adequacy and accuracy of the
related balances, and to make additional adjustments and disclosures as
necessary to ensure the accuracy of financial reporting